Biogenerics: The Next Indian Opportunity
Benjamin K. Gill
MIT Sloan School of Management
May 14, 2004
Introduction
The pharmaceutical and biotechnology industries have dramatically changed in the recent decade. New technologies and techniques have led to rapid advancement with research & development including the mapping of the human genome. This recent accomplishment has opened the doors to better understanding the human body which is expected to lead to even greater advancements in the coming decades. In such a time of historic discoveries both the pharmaceutical and biotechnology industries have come under heavy scrutiny. Doctors want a greater arsenal of medications to treat more obscure diseases, governments want tighter oversight by companies of manufacturing processes, and both patients and insurance companies want reductions in prices for drugs or at least the availability of generics to reduce their costs. A new component of scrutiny has also come from shareholders. After close to a decade of extremely high returns from such global giants as Merck and Pfizer, the past few years have been very disappointing due to inability to maintain high growth levels as a result of tremendous competition and rapidly increasing costs. More specifically, pharmaceutical companies face the challenge of balancing and appeasing all of these stakeholders when the total cost of launching a successful drug is nearing $1 billion. In response, advancements in communication technologies have facilitated globalization throughout the industry. This has allowed for both the rapid growth of pharmaceutical companies to sprout in low cost countries where citizens have high levels of education or global pharmaceutical companies to make collaborative agreements with pharmaceutical companies in those countries. One such country who has been at the heart of this movement is India. Interestingly, a majority of Indian firms have focused on manufacturing not only the raw materials but also the complete formulation and product of generic versions of pharmaceutical products. The active ingredients of pharmaceutical products are typically small chemical molecules. Diagnostic technologies have allowed the analysis of molecule composition and structure easily determinable allowing generics manufacturers to more easily enter this business. It is such skills and low cost structures of Indian firms that provide them the opportunity to enter into an industry that is in its infancy, biogenerics.
The Biotechnology Industry
The widest meaning of biotechnology encompasses all practical applications of properties of living organisms to create value. In this regard, biotechnology is used in the process of making beer with yeast to modifying the genes of living organisms with retroviruses. The maturity of advances in molecular biology and genetics has lead to economic implications for countries utilizing such techniques. This includes hybridization of plants and the production of therapeutic proteins from bacteria. All of this aside, the greatest economic and social implication is thought to come from the recent sequencing of the human genome as rapid expansion and more efficient means of drug development are expected to result. Therapeutic products developed from such technologies are termed biologics with generic forms of these products called biogenerics.
Biogenerics
Through the loss of patent expiration half of the value of the therapeutic proteins in 2001 will be exposed to generic competition by the end of 2005. Such products that would be susceptible to duplication include insulins and erythropoietins. This makes the space very attractive to potential biogeneric firms while also making payors very excited to obtain lower priced products. However, there are issues that have made this space very difficult to get into. The first is the complexity to manufacture biological products that is coupled with the extremely high costs of building a biological manufacturing facility. Biological products are derived from living organisms and as a result tend to be very large, complex, and fragile molecules. The second key issue is regulation. There is still uncertainty regarding the approval process for biogenerics considering the complexity to manufacture the product and the difficulty to ensure consistency with already approved biologics. The reason why a biological manufacturer can continuously prove bioequivalence of the product it manufacturers versus a potential biogeneric firm is that the products are typically derived from a specific cell line or culture that can be reused by the original manufacturer. The biogeneric does not have access to the identical cell line therefore the resulting product may be slightly different. As a result biogeneric firms are lobbying for approval that comparable products can be made using manufacturing techniques.
This then leads to the issue of clinical trials. For a typical, novel, small molecule (chemical) product to be approved three clinical trials are performed. Subsequently a generic version of this product would only need one trial where blood samples from humans are subsequently tested to ensure that the generic was absorbed into the system the same way as the branded product. This is relatively easy to do since small molecule products are typical administered in tablet or capsule form. Since biological products are large molecules and are very complex, they typically cannot be taken orally and are therefore directly placed into the bloodstream via injection making it very difficult to determine the absorption path. In addition, as a result of doctors being well aware that the biogeneric will not be identical to the branded product, large investments in marketing efforts would need to be launched by the biogenerics firm to convince them of the safety and efficacy of their product. If more effective ways are not created to determine the absorption pathway, the additional costs of doing three clinical trials as well as marketing would destroy the profit margins for the biogeneric. If the price reduction of the product is not offered there is then no incentive for the payor to recommend taking the generic.
It is unlikely that the method for obtaining approval for a biogeneric in the United States as well as Western Europe will be determined until 2005 or even 2006. However, even when this occurs the biogeneric firm will probably face extensive lawsuits from the original product’s manufacturer adding tremendous litigation as an additional hurdle. This has already been seen by actions taken by Amgen again Johnson & Johnson.
Regardless, companies are already marketing biogenerics outside of the seven major markets and are ready to file for approval as soon as the regulations are determined. These companies feel that the sales generated now in addition to those in Asia, Africa, the Middle East, and Eastern Europe, where approval is not expected to be difficult will cover the start-up costs and then help fund the expansion into key markets such as Western Europe and the United States as the biogeneric is awaiting approval. In this situation the first to get approval will reap the benefits; however, penetration is expected to be initially slow because of skepticism by doctors. As more doctors make the switch to the biogeneric the market should take off as confidence builds.
The Indian Market
The Indian pharmaceutical industry is worth approximately $4.5 billion and is growing approximately 8 to 9 percent annually. It is the leader in all of India’s science based industries. The Indian Pharmaceutical Industry is very fragmented with 20,000 companies registered and the top 250 firms controlling 70% of the market with the leader holding an approximate 7% market share. Over 60% of the bulk pharmaceutical products manufactured in India are exported abroad with the remaining material used for product formulation within the country making India relatively self-sufficient in regards to products. Exceptions to this now include products under patent in other countries. Although most of the nearly 1 billion people of India cannot afford market-priced pharmaceuticals the middle-class and wealthier population of India is expanding rapidly making India one of the largest consumer markets in the world.
Government Regulations in India:
The pricing of the pharmaceutical drugs is controlled by the National Pharmaceutical Pricing Authority (NPPA). The Indian government has wisely created policies that encourage companies to conduct in-house R&D by exempting them from certain price controls for a period of 10 years. In addition, if a company introduces a novel drug within the country, it too is exempt from price controls for five years. Policies have also been created for drugs that meet certain sales criteria. For instance, if sales are less than $1.1 million per year and annual turnover is greater that $0.28 million, price controls will be lifted. However, the government has the power to reinstall price controls if drug prices become unreasonably high.
A controversial issue has been India’s patent law. Since 1970 most goods were protected under the patent laws for a period of 14 years from date of filing. However, food, chemicals and pharmaceutical products were exempted and instead were granted process patents that last for a period of 7 years from filing or 5 years from patent grant date. This initially led to rapid growth of the Indian pharmaceutical companies because all that was required for successful chemical entities was a new process method. Unfortunately, this also led to a lack of incentive to research new products. Recently, India signed the Trade Related Aspects of Intellectual Property Rights (TRIPS) and the General Agreement on Tariffs and Trade agreements which has changed the patent situation. Beginning in January 2005 Indian pharmaceutical companies will follow the same rules that other international companies follow, including the prohibition of copying drugs for 20 years from the date of filing of the patent. As a result these laws will benefit companies within India that research novel compounds; however, generic manufacturers will be hindered by this change.
The Indian government is also taking steps to encourage the use of contract research within the country by allowing 100 percent foreign direct investment into the country.
In addition, Indian pharmaceutical companies are becoming more capable of meeting the strict manufacturing and quality requirements by regulatory bodies of countries such as the United States’ FDA.
India’s Move Towards Biogenerics:
India has had long standing success in manufacturing and providing chemical based generic compounds. Companies such as Cipla and Dr. Reddy’s have had tremendous success in the space from their ability to produce products in not only traditional delivery systems (capsules, tablets, etc.) but also more sophisticated delivery systems such as time-release tablets and metered dose inhalers. It has allowed them to capture an increasing share of not only the United States’ generic market which is expected to reach $18 billion in 2004 but also other countries’ markets as well. This success has now led companies to consider entering the market for biogenerics. Two key factors will determine the success of India’s biotechnology market:
1. The strategies for the uptake and implementation of technology and development of personnel competency. Luckily, India’s policy of developing a strong education system through the funding of public research and teaching institutions helps make the technology and human capital available. The ability of companies and institutions to collaborate effectively is a skill that is continuously being developed as time allows movement down the learning curve. In addition, companies have looked beyond the local institutions and have made agreements with foreign companies and foreign research institutions. Specifically, in these instances as well as in general the strategy of these Indian firms is to tap the US and Europe marketplace due to the cost competitiveness and subsequently the price competitiveness of the resulting products. Unfortunately, these marketplaces are also the most heavily regulated creating additional obstacles for the Indian firms.
2. Funding for biotechnology projects have been relatively sparse and have only come from either individuals or companies. For India to develop a strong biotechnology industry venture capital providing a combination of money as well as experience in developing biotechnology firms will be necessary.
Conclusion:
In researching how India has become well-established in the chemical generics market as well as its preparing for the biogenerics market one must question the point where Indian pharmaceutical companies will look beyond generics and begin developing novel compounds and therapies on a large scale to compete the world’s pharmaceutical leaders. It seems quite apparent that the pharmaceutical companies anticipate such a move in the future and are establishing relationships with the largest of Indian pharmaceutical companies to try to subside this possibility. To overcome this, Indian firms will obviously need to grow their core competencies in not only R&D but also marketing to key regions such as the United States. More specifically, Indian pharmaceutical companies only spend approximately 1.9% of the industry’s turnover, while foreign research based firms spend closer to 10-16% of the turnover. Indian pharmaceutical companies have great advantages over other firms in entering the biogenerics industry. Very low cost structures and highly educated citizens provide the ideal combination for entering such a complex and non-established industry. There is of course a learning curve that will need to be established for Indian firms to better understand the manufacturing of such products and dealing with the complex regulatory environment that will result. This of course will be similar to same learning curve that almost all biogenerics firms will need to overcome. However, those that act now and swiftly will reap the greatest gains. If Indian firms take the risk their footprint on the entire pharmaceutical/biotechnology industry will be greatly increased and make them a formidable player in the global market.
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